Who Killed the Postal Service?

USPS is slashing first-class delivery, cutting billions of dollars, and looking to cut thousands of workers. How did it get this bad?Wikipedia

Neither snow, nor rain, nor heat, nor gloom of night will keep your postman from delivering that Mad Men DVD you've been waiting for. But legacy labor costs and the disruptive force of the Internet? Yeah, that'll do it.

Today, the Postal Service announced roughly $3 billion in service cuts that will slow down the delivery of first-class mail for the first time in 40 years. Starting in April, it plans to shutter more than half of its 461 mail processing centers, stretching out the time it will take to ship everything from Netflix DVDs to magazines. One-day delivery of stamped envelopes will all but certainly become a thing of the past.

The announcement is just the latest sign of a sad and increasingly dire fact: the Postal Service is in shambles. This past fiscal year, it lost a mere $5.1 billion. In 2012, it's facing a record $14.1 billion shortfall and possible bankruptcy. In order to turn a profit, Postmaster General Patrick Donahoe says the agency needs to cut $20 billion from its annual budget by 2015. That's almost a third of its yearly costs.

How did it come to this? The culprits include the Internet, labor expenses, and, as with pretty much every problem our country faces now, Congress.

THE INTERNET KILLED IT

In the days of yore, sending letters by mail was pretty much the most efficient way to communicate in writing. Then the Internet happened. Although total mail volume stayed relatively steady until 2006, it has dropped an astonishing 20 percent in the past five years. More important, first-class mail, the Postal Service's biggest moneymaker, has fallen 25 percent during the past decade. That's a huge problem for its bottom line. The agency now delivers far more "standard mail" -- what most of us call junk mail -- than first-class mail. According to Businessweek, it takes three pieces of junk to equal the earnings from a single stamped first-class envelope. J. Crew catalogs and pizza menus alone won't pay the bills.

The two graphs below, courtesy of a report from the American Enterprise Institute, show the overall collapse in volume.

As the charts show, during the first half of the decade, the slow decline of first-class mail was balanced by rising stacks of corporate junk. When the economy tanked, both went into a free fall. The Postal Service delivers less mail at a smaller profit margin than it did just five years ago. And it gets worse. By 2020, first-class mail volume is expected to drop by half.

LABOR COSTS KILLED IT

Yet even as its profits have dwindled along with the mail it handles, the agency's labor costs have remained stubbornly high. Salaries and benefits make up 80 percent of the Post Office's budget. By comparison, FedEx spends 43 percent of its budget on labor, while UPS spends 63 percent, according to Businessweek. Why the disparity? As the magazine put it, "USPS has historically placed the interests of its unions first." For years, it has happily negotiated contracts with generous salary increases and no-layoff clauses.

That seems to finally be changing. As part of his budget-cutting campaign, Donahoe is looking to slash roughly 220,000 of the Postal Service's 653,000 employees. About 100,000 of those cuts would happen through attrition. Meanwhile, Donahoe has asked Congress for permission to break the no-layoff provision of the service's current contracts so it can let go the additional 120,000.

The key words there, of course, are permission from Congress.

CONGRESS KILLED IT

The Postal Service as we know it today was created in 1970. The Postal Service Reorganization Act was intended to transform the mail system from a dysfunctional dumping ground for political patronage into a self-sustaining, independent agency. It was told, in other words, to act like a business.

But the politicians never really let it. The Postal Service doesn't receive any taxpayer dollars, funding itself entirely through customer revenue. But it still has to deal with Congress as a micromanager. It isn't allowed to shutter post offices for purely economic reasons, meaning that roughly 25,000 of its 32,000 now operate at a loss. It needs permission for rate hikes from a special regulatory commission. And for 30 years, it's been required to deliver mail on Saturdays, even though that day is a money loser.

The Postal Service's current woes are also due at least in part to Capitol Hill's meddling. In 2006, Congress passed a new law requiring the agency to pay about $5.5 billion a year into a trust fund for future retiree health benefits. When revenues were rising, the idea might have seemed reasonable. But the timing was exquisitely bad. Now that the agency is in the red, the pension burden has helped to force drastic measures like the ones we've heard about today.

The Postal Service is begging Congress to ease up on the prepayment requirement, return part of its overfunded pension obligations, and give it more flexibility to manage its business. But, surprise surprise, gridlock could doom its efforts. Separate bills have passed House and Senate committees that would try to help the Postal Service avoid bankruptcy. But the two pieces of legislation have significant differences. For instance, the House version would let the post office end Saturday deliveries immediately. The Senate version forces the Postal Service to wait two years and try alternative cost-saving measures first. It's unclear if the two chambers will reach a compromise.

In the meantime, plan on waiting longer for that DVD. ___________________________

Update: While writing this piece, I thought it would be clever to use the famous inscription from New York's James Farley Post Office as part of my lede. Sadly, it looks like I wasn't as original as I had thought. After publishing, I discovered an Economist article that used essentially the same punchline in its headline. True to form, they were a little pithier than I was. And of course, they got there first. Kudos.